Tax issues

by Laurie
(Philadelphia)

1. My husband and I are co-owners of an LLC. Is this considered a multi-member LLC for tax purposes?

2. In order to take advantage of HRA 105 for health insurance premiums, we are interested in changing the LLC to a single member, with my husband as owner and me as employee. We live in PA. However, I have done some reading on the internet and am concerned that the single member LLC will not be considered a partnership LLC for tax purposes, and that the veil can be pierced. Can you advise on this?

Answer

1. It can be, or it can be considered a disregarded entity by the IRS, and taxed as a sole proprietorship.

2. There is some confusion about being taxed as a partnership for single member LLCs. In the sense that you get pass-through taxation, SMLLCs and multi-member LLCs are both taxed as partnerships.

The difference is how the tax is reported. If you are a multi-member LLC, the LLC files an informational partnership return, Form 1065. It then distributes K-1s to each partner, which is used by each partner to complete their 1040.

With a SMLLC, you don't file a Form 1065 + K-1s, but instead list all your business expenses and revenues on Schedule C of your 1040. It cuts out on step of paperwork.

In the situation where both members of the LLC are husband and wife, filing a joint tax return, you can see that whether you do a 1065 + K-1, or report the figures directly on the Schedule C, the final number in terms of tax owed is the same.

So the IRS lets multi-member LLCs whose sole members are husband and wife filing jointly to file as a disregarded entity.

As far as veil piercing, being a single member LLC, in of itself, is not a factor in piercing the corporate veil.

If you follow the basic corporate rules (keep separate personal and business bank accounts; don't commit fraud, etc.), there is little risk of veil piercing.

Veil piercing is unlikely to occur due to an innocent "mistake" by the company owners--it's an extraordinary remedy, and usually employed by courts only when the owners are committing obvious fraud on their corporate creditors.